By David Enna, Tipswatch.com
Note: I am posting this auction preview early because my I Bond buying guide will be going up Sunday morning. Keep in mind that real yields are currently highly volatile and will change by Thursday’s auction.
The U.S. Treasury on Thursday will offer $22 billion in a new 5-year Treasury Inflation-Protected Security, CUSIP 91282CKL4. The real yield to maturity and coupon rate will be set by the auction results.
Definition: A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So, the “real yield to maturity” of a TIPS indicates how much an investor will earn above inflation each year until maturity.
As the market stands one week out, it looks like this TIPS will get an attractive result: Potentially both a real yield and coupon rate higher than 2.0%. The Treasury’s 5-year real yield estimate as of the market close Thursday was 2.13%, which would result in a coupon rate at or above 2.0%.
But this market is volatile. Wednesday’s March inflation report reminded everyone that inflationary trends are continuing, and set off a rout in both the stock and bond markets. The 5-year real yield has increased 20 basis points since April 1. That is a huge move higher.
It appears that things are cooling today, with the 5-year TIPS trading at about 2.05%. So a lot can change before Thursday’s auction close at 1 p.m. EDT.
More auction details:
- The Treasury offering of $23 billion is the highest ever for an TIPS auction of this term, up from $21 billion at last April’s auction. The increased supply, however, shouldn’t have much effect on demand.
- The 5-year auction in October 2023 resulted in a real yield to maturity of 2.440% and a coupon rate of 2.375%, both 15-year highs. This auction looks unlikely, at this point, to break those marks.
- If the coupon rate remains above 2.0%, it will be only the 2nd 5-year TIPS in 17 years to reach that mark.
Here is the trend in 5-year real yields over the last nine years:
So there is a lot to like about this TIPS, even in comparison with the U.S. Series I Savings Bond, currently with a real yield of 1.3%. The TIPS will probably have a 70+ basis-point advantage. At that spread, I would prefer the TIPS (but I continue to invest in both.)
Pricing
Because it is a new TIPS, CUSIP 91282CKL4 should auction with a price close to par value. The coupon rate will be set at the 1/8th-percentage-point marker below the auctioned real yield, so the unadjusted price will be below 100. However, this TIPS will have an inflation index of 1.00309 on the settlement date of April 30. Because of that, the price should be close to par, or even slightly above.
Inflation breakeven rate
With the nominal 5-year Treasury note currently trading at 4.54%, this TIPS at this moment would have an inflation breakeven rate of about 2.49%, fairly high by historical standards. A higher breakeven rate indicates that a TIPS is more expensive versus a nominal Treasury.
Is the 5-year note attractive at 4.54%? I’d say it is and it is likely to provide a return above inflation over the next 5 years. But with the TIPS, you get a guaranteed return of about 2.0% above inflation. I’d go with the guarantee.
Here is the trend in the 5-year inflation breakeven rate over the last 9 years, showing that the current level is high-ish, but well under the peak we saw in 2022.
Final thoughts
I just took a look at my 2029 TIPS holdings and I am decently allocated for that year. However … I may take a look at adding a bit at this auction if the real yield is likely to hold above 2.0% (a desirable target by historical standards.)
Things could get crazy in the next week, however, with a potential attack by Iran against Israel looming, oil prices rising, inflation fears growing. In times of fear, Treasury yields generally fall as demand rises. If you want to invest in this TIPS, keep an eye on the Treasury’s Real Yields Curve page (which updates at the close of the market each day) and Bloomberg’s U.S. Yields page (updates secondary-market trends in real time).
This TIPS auction closes Thursday at 1 p.m. EDT. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline.
I will be posting the auction results soon after the close on Thursday. Here is a history of auction results for this term over the last 9 years:
• Now is an ideal time to build a TIPS ladder
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• TIPS on the secondary market: Things to consider
• Upcoming schedule of TIPS auctions
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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
After swearing off ever buying TIPS at auction again, I got in on this one. I was hoping for a little higher coupon rate (2.125%), but at least it’s over 2% (but lower than last October’s 2.375%). After all this reading, I’m still not quite sure what to think about TIPS. I used to think calculating I Bond values was complicated, but it’s a piece of cake compared to TIPS!
I am considering buying this 5yr TIPS as my first TIPS investment. The real rate will be about 2.15% with a coupon of about 2% for a total of about 4.15%. Why is the total rate so low when inflation is about 3.5%, which would seem to result in a 5.15 yield?
Thanks for your help.
Sorry, I meant to say a total of 5.65% when inflation is 3.5%.
The market is pricing in inflation of about 2.48% over the next 5 years, so the expectation is that inflation will continue slowing but possibly still above the Fed’s target. No one knows.
Wow, thank you very much for responding so quickly!
Steve
I originally bought a 5 year TIPS at TD Ameritrade back in Nov 2022. It then got moved to Schwab because of their merger. My question is – how/where should I check for the exact principal amount that I should be getting when it matures? I want to be able to tell Schwab the exact amount in case they have not fixed this problem for another 3.5 years 🙂
There was no 5-year TIPS auction in Nov 2022, so I assume this was on the secondary market? But I will assume it will mature in October 2027, CUSIP 91282CFR7. As of May 1, that TIPS will have an index ratio of 1.04759, so the principal on that date for $1,000 will be $1,047.59. The principal value is par value x index ratio, all the way to maturity. You can track the index ratios on this page: http://eyebonds.info/tips/2024/tips90_2024.html
David, if the market is pricing inflation at abt 2.48% over the next 5 yrs, isn’t this abt the same rate as the probable breakeven rate you posted? Is tomorrow’s auction still a good buy? Trying to decide… Thanks
Yes, the 5-year inflation breakeven rate is the market’s prediction of inflation in the next five years. If you think inflation will be higher than 2.48%, you buy the TIPS. If you think it will be lower, you buy the nominal 5-year.
Hi David,
Just wondering if you still think the 5 Yr Tips auction on 4/18 given where things stand right now with rates is attractive?
Any additional thoughts about it?
The market real yield seems to be holding around 2.13%, so not much has changed despite recent volatility. The auctions can get odd results, but I will probably be a buyer of a small amount on Thursday.
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Moved from TD Ameritrade to Schwab due to buyout. I had a TIPS mature Apr 15 and they matured it at the original principle only. Had to call them the next day to get it corrected.
I also noticed Schwab’s idea of a TBill rollover is to not roll it on the maturity date (as Fidelity) but to wait for next auction of comparable bill. In my instance a 6 month bill had to wait a week to be reinvested. Schwab said they get complaints but not changing policy.
Any similar issues with Schwab like this out there?
You are the 2nd person to report this TIPS maturity error. Seriously, this is an outrage. Schwab needs to own up to this.
Yes, that’s now TWO complaints. It seems like a complaint to the SEC is in order if Schwab is systematically failing to account for the inflation-adjustment to the principal. How could they be so incompetent!?!
I moved my T-bill ladder from Schwab to Fidelity because of Schwab’s “delayed rollover”. Years ago Schwab had a good “cash sweep” that would automatically move your cash into a money market fund of your selection, but they got rid of it. I think the cash account is a “cash cow” for them now, but I try to stay on top of things and transfer the cash frequently.
Just a note of thanks to David. Valuable information unavailable elsewhere, to my knowledge. And I really appreciate the insights provided. I will be a buyer, seems too good to pass up.
I have a two general question on TIPS taxes.
I understand that the tracking of TAX obligation is complex ( I have never checked into the details this myself).
I have TIPS in my Schwab account, and the reporting, as far as we can tell, allows one to just import the 1099 and complete the tax return as usual. The 1099 does take account of the imputed income, etc. However, I don’t think we would know there were errors unless we got a notice from the IRS.
I have never owned a TIPS in a taxable brokerage account, so I can’t say for certain what happens there. At TreasuryDirect, in February it issues 1099 forms that you have to log in, download and print. The forms will include 1099-INT for interest and 1099-OID for inflation accruals in that year. I am assuming a brokerage would issue these same forms, but in a more organized way. Read this on the TreasuryDirect issues: https://tipswatch.com/2024/01/28/treasurydirect-1099s-how-to-find-tax-forms-decipher-them/
I needed to fill out the 2029 rung on our TIPS ladder and was planning to buy this TIPS at auction. However, today’s YTM for all the 2029s were above 2%, refocusing my thoughts to the July 2029 (CUSIP 9128287D6) which has a very low coupon. I purchased that TIPS instead in light of the likelihood the new TIPS will probably have a coupon above 1.5% in order to avoid coupon reinvestment risk. I just wish there were zero interest TIPS that would negate that risk to YTM entirely.
It’s weird because I would rather have the high coupon rate, but I understand the strategy. This particular TIPS (as opposed to some others maturing in 2029) has a “fairly” low inflation index of 1.209, so you would be buying 20% additional principal at a discounted price of about 91.03. That additional principal isn’t deflation protected, but no huge deal. You could look into STRIPS, which are only available through brokerages, but I know little about that process.
Dave, Do you spend the coupon proceeds or reinvest them? If the former, then the original YTM when you bought it will be lower at maturity; if the latter, you are trying to find an investment vehicle that will at least be equal to what inflation plus your real at purchase is each coupon period. But, that is only knowable after the fact. I prefer to keep my investing guesses to a bare minimum. That is why I like IBonds which are essentially zero TIPS; no guessing, just inflation plus fixed. I recognize there is a deflation risk with this purchase, but I am willing to assume it considering the Fed will do everything in its power to avoid any prolonged period of deflation. Some may point to the Japanese experience, but I would offer our economy and demographics are very different from theirs, so a slump like theirs is extremely unlikely.
The real yield to maturity of a TIPS does not depend on reinvesting income, at least in the sense of a nominal bond. When you invest in a TIPS you get a principal base and a coupon rate. The principal base rises with inflation, and the coupon payment also rises with inflation as the principal balance rises. You are getting an inflation-adjusted real yield. However … your principal paid out at maturity won’t include the coupon payments. So in that sense, if you are looking for that compounded inflation-adjusted principal at maturity, an I Bond meets that need better.
I’m a couple of years from retirement so just starting to build out some holdings in 5 & 10 year TIPS. I’m buying in my Trad IRA through the auction via Vanguard, and allocating $4,000-5,000 each year for the next few years. My dilemma is whether to buy 5 or 10 year TIPS. While the numbers look good now for the ‘5’, how much better or worse might they look for the ’10’ in about a month, or a subsequent ‘5’ auction? Is there some way to reasonably consider how best to buy a limited amount of TIPS this year?
Both looks like good purchases right now, with the 5-year with a real yield of about 2.07% and the 10-year at 2.11%. It’s impossible to say where yields are heading. Another possibility would be to buy the maturities you want on the secondary market.
When I logged onto Treasury Direct and selected the upcoming 5 year TIPS auction, one of the choices available was to reinvest the dividends. I understand how that works with T Bills, but how would that work with TIPS given they are offered on an irregular basis? Thank you.
I think what you were seeing was “Schedule Reinvestment – One Time” … which would schedule a reinvestment into a 5-year TIPS at maturity in April 2029. (I think.) I had not noticed this before, but it seems of limited use for a 5-year investment. I do the auto reinvestment for all of my 13- and 26-week T-bills and that works well.
A word of caution on auto rollover. I checked this just last week for my 4-week Bills buy on Schwab. I decided to continue doing it manually by selling my money market fund units on the day of the settlement. I will try to explain the issue with an example. 4-week bills are auctioned on Thursday and settled on Tuesday. If my previously bought 4 week bill matures on the settlement day (Tuesday) of the newly bought 4 week bill, Schwab keeps the proceeds from the matured bill as cash for a week to settle the next buy. In short, in a year, you could have Schwab keep your cash, from each buy, for 12 weeks. Apologies for not exaplining well enough, just call your broker to make sure how they do this automatic rollover.
I’ve heard this before about Schwab. TreasuryDirect does same-day rollovers, so there is no lag. I don’t know about other brokers.
That is good to know, thanks! I never did auto roll at Fidelity because the redemption dumps into a money market fund that’s usually pretty close to the Tbill rate. Unlike TDAmeritrade which goes into the settlement account at .02% last I checked.
Thanks for this. I definitely intend to buy this offering.
I see you’ve already seen this same note. I was typing when that was posted.
Yes, I love my readers (er … editors), thank you for your alert.
The reference to the April 2023 5 Year auction says: “That auction in April 2023 resulted in a real yield to maturity of 2.440% and a coupon rate of 2.375%, both 15-year highs. This auction looks unlikely, at this point, to break those marks.” This doesn’t match the data in your table (real YTM of 1.32% and coupon of 1.25%), which I believe is correct. Thanks
Thanks, I mixed up April and October. I will fix this.